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German economy 'on verge of boom'

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German economy 'on verge of boom'
Photo: DPA
15:47 CET+01:00
The Institute for World Economics in Kiel (IfW) published a report on Monday arguing that the European Central Bank's (ECB) monetary policy is going to have a destabilising effect on the German economy - despite what might at first look like a positive impact.

In the report, which gives a prognosis for Germany's middle term economic future, the experts predict Germany will enjoy strong growth over the next four years, but it warned that this growth would not suit the conditions of the labour market.

“[German] economic policy is going to face significant challenges over the coming years. A boom is no reason to celebrate, it is actually a cause for concern.

"With stability in mind, a boom is just as much of a miss-step as a recession,” said Prof Dr. Stefan Kooths, Director of the IfW prognosis centre.

The IfW argues that the ECB's policy of pouring over a trillion Euros in extra cash into the Eurozone economy, together with interest rates of close to zero percent, will place strains on the German economy which it has not seen since reunification in the early 1990s.

GDP will grow strongly up to 2019. “The cause from the German point of view, is the extremely expansive monetary policy of the ECB,” said Kooths.

Due to its ageing population, the German labour force will shrink in the medium term.

Immigration can only partially alleviate the effects of this process, the IfW experts argue.

The result will be an output gap - the difference between the theoretical maximum an economy can produce and its actual output - of 3 percent, a difference that hasn't been seen in over 20 years.

One positive effect of the boom is that it will lead to a further drop in unemployment levels.

The Agentur für Arbeit (Job Centre) projects that joblessness will stay below 5 percent until 2019.

But the report warns that a boom could have negative effects on the financial sector.

They warn that the ECB monetary policy could lead to a loss of belief that interest rates will stay low. This could have destabilise exchange rates an harm the international financial markets, the experts warn.

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